Risk assessment

Ongoing internal reforms combined with the gradual lifting of US sanctions are expected to boost activity in 2016

The rebound in Cuban growth in 2015 is mainly explained by good performance in the manufacturing (mines), construction, and distribution (retail sales) sectors, and by an increase in tourist numbers. In 2016, continuing internal reforms aimed at the gradual liberalisation of the economy, as well as the progressive relaxation of US sanctions should continue to support the country's growth.

Domestically, the adoption of the law regulating foreign investments, which now allows the acquisition of participating interests in Cuban businesses (except those operating in the areas of health, education and defence), should stimulate private investment. The gradual withdrawal of the Cuban State in favour of the private sector is also expected to have a positive impact on productivity and wages, in the medium to long term. Externally, the restoration of relations with the United States should help ease the limits on external finance. Moreover, the easing of some sanctions has already positively impacted tourism as well as business and household confidence. The Cuban government is likely, meanwhile, to apply a policy of administered price control (imports account for 70% of basic food consumption) in order to prevent a rise in inflation to the detriment of growth.

Exactly how the two Cuban currencies, the convertible peso (CUC) pegged to the dollar (used by tourists and for emigrants' remittances), and the national peso (CUP, which converts at a rate of 1 CUC to 24 CUP) in which wages and locally produced goods are set, will be unified remains uncertain. As the country can only benefit from very limited foreign capital flows because of the embargo, it will probably have to wait until this embargo is finally lifted if it is not to see to its foreign exchange reserves collapse when an interim exchange rate is fixed.

Cautious management of the public and external accounts

In 2015, the budget deficit was affected by the heavy burden of subsidies (staple goods, electricity, healthcare and education), which represent a quarter of public spending. The State's gradual removal of subsidies, in particular through the implementation of liberal reforms in favour of the private sector, should help reduce the deficit in 2016. Public sector job cuts together with the expansion of the private sector will help contain spending while generating additional income (only income from non-State activity is taxable). Public debt is expected to decline as the various debt-rescheduling agreements are signed.

With regard to external trade, Cuba relies heavily on its exports of services (tourism and medical services) and depends strongly on food and energy imports. The balance of trade in goods traditionally runs a deficit, affected especially by insufficient local production, which suffers from a lack of investment due to the considerable financial cost triggered by the embargo. The gradual opening of Cuba's economy in 2016 is likely to be accompanied by a rise in the current account deficit due to the expected increase in imports needed to revive local production and plug the infrastructure gap which the country has built up over several decades. The resumption of relations with the United States and the adoption of the foreign investment law are, however, expected to encourage inflows of foreign capital, thus helping to finance the deficit.

Towards the normalisation of relations with the United States

Initiated in December 2014, the restoration of diplomatic and trade relations with the United States augurs well for Cuba. The timetable for the final lifting of the embargo remains uncertain, although the international community still hopes it will happen before President Barack Obama leaves office in 2017. Venezuela is still Cuba's main political, financial and commercial ally. The worsening economic situation in Venezuela could, therefore affect Cuba, but their ideological closeness suggests that Cuba is less likely to be hit by possible disruption to deliveries of Venezuelan oil.

Internally, Cuba's political system is dominated by a single party, the Cuban Communist Party (PCC). The lifting of US sanctions and continued deregulation of the economy could however trigger political change at the next elections scheduled for 2018.